Wall Street Banks Could Take Massive Hit From LIBOR Scandal

The unfolding scandal is likely to hit Wall Street's biggest banks. UK regulators are reacting, and the debacle could have long-lasting consequences on the U.S. financial system, experts suggest.

Wall Street should brace itself as the LIBOR scandal is about to hit U.S. shores, experts suggest.

As Paul Tucker, a deputy governor at the Bank of England, gives evidence Monday as to whether senior government officials put pressure on Barclays to lower the LIBOR rate, the scandal is likely to extend to Wall Street as has already been demonstrated by Barclays’ $453 million settlement with U.S as well as British bank regulators, the UK’s Guardian newspaper says.

Wall Street banks including JP Morgan Chase, Citigroup and Bank of America are likely to have been involved in similar maneuvering to Barclay's, who couldn't have rigged the Libor without their involvement, industry observers say.

From the Guardian:

The reason they'd participate in the scheme is the same reason Barclay's did – to make more money.In fact, Barclays' defence has been that every major bank was fixing Libor in the same way, and for the same reason. And Barclays is "co-operating" (giving damning evidence about other big banks) with the justice department and other regulators in order to avoid steeper penalties or criminal prosecutions, so fireworks in the US can be expected.

Manipulating the Libor is a huge deal as it is used to set rates on mortgages, credit cards and all sorts of loans, personal and commercial. The amount of money affected by the rigged rates is at least $500 trillion, British regulators have estimated.

The New York Times also notes that Barclays is not the only bank under investigation for rigging the Libor. “It was simply the first to own up to the behavior and settle with regulators, paying $450 million. Other banks will almost certainly follow, and the documents bound to bubble up in those cases will surely prove fascinating,” the Times reports.

From The New York Times:

One of the most revealing exchanges in the Barclays documents came when a bank official tried to describe why Barclays’s improper postings were not as problematic as those of other banks. “We’re clean but we’re dirty-clean, rather than clean-clean,” an executive said in a phone conversation. Talk about defining deviancy down.

“Dirty clean” versus “clean clean” pretty much sums up Wall Street’s view of cheating. If everybody does it, nobody should be held accountable if caught. Alas, many United States regulators and prosecutors seem to have bought into this argument.

British authorities at least, are putting their foot down.

While U.S. regulators have so far failed to hold any Wall Street executive accountable for the 2008 financial crisis, the UK’s equivalent of the SEC, the Financial Services Authority (FSA), as well as the Bank of England, are apparently directly responsible for ordering last week’s removal of Marcus Agius, Barclays’ chairman, asa well as Bob Diamond, the CEO, and Jerry del Missier, the bank’s chief operating officer.

The Times notes that perhaps the biggest lesson from the Libor scandal is how “dangerous it is to rely on interested parties to set interest rates or prices of financial instruments, rather than on actual transactions conducted by investors.”

From the NY Times:

Prices of derivatives, especially credit default swaps can still be based on one dealer’s say-so. That’s why a rule proposed by the Commodity Futures Trading Commission that would require pretrade price transparency in the swaps market is so important.
But it is also why Wall Street is pushing back, especially on the commission’s proposal that swap execution facilities provide market participants, before they buy or sell, with easily accessible prices on “a centralized electronic screen.” The commission’s rule would eliminate the one-to-one dealings by telephone that are so lucrative to traders and so expensive to investors.

A bill intended to gut the commission’s proposed rule and to maintain dealers’ profits in derivatives failed to go anywhere after being passed last year by two committees in the House of Representatives — Financial Services and Agriculture. That was a good thing.

But there are rumblings in Washington that this bill has resurfaced and that it may be quietly attached to a House Agriculture Committee appropriations bill scheduled for a vote this month. The bill, if passed, would bar the requirement for a centralized pricing platform to shed light on the enormous swaps market. It would also prevent regulators from requiring that a number of participants provide price quotations to customers, a way to ensure fairness.

In the wake of the LIBOR scandal, it will be hard for Wall Street to continue to battle against price transparency, the Times notes. At the very least, a widening scandal could (possibly) remove another layer of apathy from the U.S public towards Wall Street.

The Guardian notes that across America, “one hears a growing demand that Glass-Steagall be reinstituted and that the biggest banks be broken up.”

The biggest question, the Guardian adds, is “whether the unfolding Libor scandal, which will soon hit these shores, will provide enough ammunition and energy to finally get the job done.”

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio